"If you ever plan to motor west, travel my way, take the
highway that's the best . . . Get your kicks on Route 66."
― Bobby Troup
From space many places on Earth look pretty flat. From the
ground more obstacles become apparent: Granite mountains
loom in places where chasms divide neighboring areas. Both
perspectives tell you something you need to know. The space
view shows you the most direct route as the proverbial crow
flies, while the close-up view shows you obstacles that are
well worth avoiding where that's possible. In this article,
the broadest perspective, like that from space, is
emphasized. That perspective encompasses expanding your
business model (the who, what, when, why, where, how, and
how much of your offerings) in volume-improving ways.
In considering how to expand your business model's delivery
of offerings and benefits, you should be guided by what
will be easily understandable and desirable by your
stakeholders (those who are affected by what you offer) . .
. and where the adjustments will provide more profit for
businesses and more effectiveness for nonprofit
organizations. Business model innovation is something that
many organizations struggle with. In this article, I've
broken out the elements and added continuing examples to
make innovative business model thinking and analysis easier
to do. This article's material will, however, be clearest
to those who have already read about continuing business
model innovation.
Expand What You Do Now
Unless you are providing a very small percentage of the
needs of each customer or beneficiary, growing by 21-fold
requires adding customers or beneficiaries. Because so many
organizations can expand to provide 21 times the number of
customers or beneficiaries, that's a great place to begin.
You should start by considering who you will serve as these
added customers and beneficiaries and where those benefits
will be delivered to make the expansion more practical.
Let me share a story with you that I first examined in an
earlier book to help make that point about who and where
clearer. A young married couple, Mr. William and Ms.
Dorothy Hustead, bought a small store in a tiny town near
the South Dakota Badlands. From 1931 to 1936, they
struggled through the Depression serving the town's 326
impoverished residents. One day in 1936, Ms. Hustead,
bothered by the sound of cars on the nearby highway heading
for Mount Rushmore, persuaded her husband to expand their
business to serve these travelers. Mr. Hustead put up signs
on the highway to draw visitors to their store, making a
unique appeal. The signs said, "Free Ice Water . . . Wall
Drug." In those days before automobile air conditioning
was common, that offer was a powerful appeal. Beginning
from this humble expansion of its customer base, Wall Drug
now serves more than 20,000 visitors a day during the
summer in its Wall, South Dakota, store and many more on
its Web site.
Who Is Served and Where
Let's begin considering volume-expanding business models by
looking at "who" is served. The lesson is to keep it
simple. Change as little as possible while becoming more
efficient and effective as an organization for your
customers and beneficiaries. The simplest way to do this is
to put more volume through an existing organizational
structure without adding fixed costs or increasing the
ratio of variable costs to sales.
In a for-profit organization you will naturally first want
to attract the most profitable potential customers. If
current customers buy a very small percentage (say 1 to 2
percent) of their needs from you, such a profitable
expansion may simply be possible by selling 40 to 50 times
more to selected current customers. You are already
spending time and money to gather a small part of these
customers' total requirements. In many cases your overhead
costs to provide more products and services would not
increase.
Let's assume your current pretax profits are 10 percent of
sales and your contribution to profits before overhead
costs is 30 percent of sales. This circumstance means that
selling more of the same mix of offerings at the same price
to an existing customer would almost triple the profit
contribution margin on the increased sales. Were that to
occur, a 20 times increase in volume would lead to a 60
times increase in profits!
See Example 1 if you want to explore how this could happen.
Example 1: Adding 20 Times More Revenues Without Increasing
Overhead Costs Speeds Profit Growth
If corporate overhead cost remains constant while profit
contribution grows to $6.3 million from $0.3 million,
pretax profits expand by $6.0 million (60-fold) while
earning the same profit contribution as a percentage of
revenues.
Annual Pro Forma Financials Before Volume Expands
Revenues $1,000,000
Cost of providing offerings $700,000
Profit contribution $300,000
Corporate overhead cost $200,000
Pretax profit $100,000
20 Times Volume Increase with No Additional Overhead
Expenses
Revenues $21,000,000
Cost of providing offerings $14,700,000
Profit contribution $6,300,000
Corporate overhead cost $200,000
Pretax profit $6,100,000
Copyright 2007 Donald W. Mitchell, All Rights Reserved
----------------------------------------------------
Donald Mitchell is chairman of Mitchell and Company, a
strategy and financial consulting firm in Weston, MA. He is
coauthor of six books including The 2,000 Percent Squared
Solution, The 2,000 Percent Solution, and The 2,000 Percent
Solution Workbook. You can find free tips for accomplishing
20 times more by registering at:
====> http://www.2000percentsolution.com .
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